Confidence is A Con Man’s First Name And Government’s Last Scam

Confidence is important in economics. People spend and invest more when they are confident, a fact which should be obvious.

The relationship between confidence and economic activity is well known. All else equal, the higher the confidence the more likely a person is to spend and the more economic activity occurs. There is an obvious correlation between the two.

Correlation and causation are not the same. To illustrate, let’s use an example. A rooster crows at the crack of dawn. The crowing and sunrise are correlated because they occur simultaneously. The causal relationship (i.e., one happens causing the other to happen), if one exists, is less clear. Does the rooster cause the sun to rise? Stupid roosters might believe so, but that clearly is not the case.  Whether the sun causes the rooster to crow is more plausible, although for someone who rarely leaves pavement, I am reluctant to even concede that. Another possibility is that the two events are not causally related to each other but to some third factor which produces the sun and rooster effects to occur around the same time.

Confidence and economic activity are correlated. Is there a causal relationship present? If there is, which effects the other? The relationship could be argued either way. There might even be a complex relationship where causation flows both ways, with one feeding off the other. That is, confidence cause economic activity to increase and economic activity causes confidence to rise. The government believes that confidence causes economic activity. At least that is how Charles Hugh Smith views its behavior:

Does believing in the “recovery” make it real? The propaganda policies of the Federal Reserve and the Federal government are based on the hope that you’ll answer “yes.” The entire “recovery” is founded on the idea that if the Fed and Federal agencies can persuade the citizenry that down is up then people will hurry into their friendly “too big to fail” bank and borrow scads of money to bid up housing, buy new vehicles, and generally spend money they don’t have in the delusional belief that inflation is low, wages are rising and the economy is growing.

Mr. Smith knows the answer to his rhetorical question is “No.” Yet many others apparently do not. To believe that confidence can be raised is to believe that rhetoric and manipulated statistics can trump the reality faced by consumers each and every day. Even if that were possible, it is unclear that confidence drives economics instead of the other way around. In essence, government seems to believe that if it can “fix” the rooster the sun will come up tomorrow.

Though government may believe such a causal relationship exists, does not validate the relationship. People are smarter than that. Consumers in over their heads with debt and shrinking disposable income are unlikely to feel more confident just because the government issues some favorable, arcane economic report.  How realistic is it to expect the following?

In other words, the “virtuous cycle” of new debt feeding economic growth is based on conning (or brow-beating) the American public into believing that the “recovery” is real. Our “leaders” hope this baseless belief will spark a buying frenzy that then fuels a real recovery.

Where Did The Confidence Notion Come From?

The belief that confidence is a causal factor rather than an effect is traceable to John Maynard Keynes. Keynes dealt with economic aggregates and their relationships with one another (e.g., will an increase in government spending cause a rise in consumption?). His approach was initially unique in that he abandoned centuries of economic thinking which predominantly focused on individuals and not aggregates. His theory provided the basis for the dichotomy we know in economics today — microeconomics and macroeconomics. Microeconomics focuses on the individual decision maker whether it be a person, firm or other decision-maker. Macroeconomics represents the monetary summation of the decisions as they reflect in the aggregates.

Keynes did not bother with individual incentives and disincentives. His was a big picture approach. His macroeconomic model was simplistic — a few key measures which reacted mechanically with one another. His famous equation, Y = C + I + G  (where Gross Domestic Product = Consumption + Investment + Government {assuming a non-import/export economy}) purported to provide the tool by which central planners could manipulate GDP. By influencing variables, government could drive the other variables to proper levels. In its essence, Keynes viewed economics as a large machine with which you could affect output by manipulating inputs.

We know that when incentives change individuals react by adjusting their behavior to the new signals. When enough individuals react, the results show at the aggregate level. Economics used to be a study of individuals and how their behavior was affected by changes in their environment. The substance of incentives and disincentives is lost at the aggregate level, although the reality of these signals are eventually reflected in outcomes. Aggregates are summary data, a convenient means of summarizing historical data. They do not act or make decisions; hence they are not proper variables for any economist other than an economic historian.

The Keynesian system abstracted real economics to such a degree that it became sterile. Keynes had no way to account for changes in behavior at the level of the individual other than to invent the term “animal spirits.” The very term is indicative of its weakness. Economics, quite simply, is based on purposeful behavior, and animals do not reason like man or engage in truly purposeful behavior.

This definition of animal spirits comes from The Economist:

The colourful name that keynes gave to one of the essential ingredients of economic prosperity: confidence. According to Keynes, animal spirits are a particular sort of confidence, “naive optimism”. He meant this in the sense that, for entrepreneurs in particular, “the thought of ultimate loss which often overtakes pioneers, as experience undoubtedly tells us and them, is put aside as a healthy man puts aside the expectation of death”. Where these animal spirits come from is something of a mystery. Certainly, attempts by politicians and others to talk up confidence by making optimistic noises about economic prospects have rarely done much good.

The last sentence reflects on the government’s choice to make people believe. It does not deal with the effect of achieving a boost in confidence. While it appears The Economist assumes that would raise economic activity, there is even less evidence for that.

The animal spirits analogue ignores the fact that people respond to incentives and do so rationally (at least in their own minds). Animals do not have complex reasoning faculties like humans. While animals are rational to a degree, it is in a simplistic fashion — hunger triggers a seek food response, threat triggers an avoidance response, etc. The complexities of the human mind are not available to animals, hence concepts of planning for the future, problem-solving, improving methods, complex trade-offs, etc. are absent, or so primitive as to be meaningless. Animal behavior is mostly instinctual, at least in comparison with man.

Keynes’ lip service to individual behavior is akin to today’s pop psychology. It is built on the notion that if you can visualize something you can make it occur. While confidence is not unimportant, it is an effect rather than a cause. That may be why The Economist has judged efforts to move confidence as having little value.

What Creates Confidence?

Human beings, by nature, are optimistic. Confidence is natural, except when facts contradict it. To be optimistic in the face of negative realities is to be irrational.

“Animal spirits” or whatever motivates confidence is not an exogenous variable which can just be assumed or created. Confidence is a product of the current and perceived situation. Confidence does not determine economic outcomes so much as it is determined  by economic expectations. Contrary to Kevin Costner’s “field of dreams” approach, merely thinking or building something will not cause it to succeed (“build it and they will come”). Confidence in the face of negative hard facts is irrational. Worse, it is stupid!

The notion that government can raise confidence with phony data and reports is highly questionable. The further notion that doing so will cause a rise in economic activity is a variant on field of dreams — “raise it (confidence) and they will spend.” Try going to the grocery store and buying a loaf of bread with confidence instead of dollars. Sadly, the rooster crowing does not cause the sun to rise.

Why Try To Generate Confidence?

Many politicians know economic conditions are dire. Yet it is in their best interests as incumbents to convince you otherwise. Confidence is important to them on two levels:

  1. It enables individuals to retain office
  2. It allows government to continue a while longer

Propaganda as a means to do so is merely an attempt to keep the scam alive. It is the only tool they have left.

Elections are never more than two years apart under our system. For incumbents, it is important that you be confident and re-elect them. For non-incumbents trying to change their status, it is important that you be worried and negative. Unfortunately for you and me, the incumbents control the data and the megaphone known as the mainstream media.

Most people accept that politicians regularly lie. Deceit is either in their genes or an acquired trait necessary to advance in the political sewers through which they pass. Politicians understand their time is short and their ability to continue to fool enough people to keep their scams going is limited. Conditions have deteriorated so far that, today, the need to convince as many people as possible that conditions are good and improving has never been greater. The economy is so bad that smoke, mirrors and lies are the only tools left for the political class.

Savvy individuals know what is happening. The ones whom government is presumed to help, the bottom-half of the income scale, generally do not understand. They are the most vulnerable and gullible to government promises and lies. They are always the targeted victims of government scams. They represent the most votes and are the easiest to con.

In order to facilitate the two objectives above, government is attempting to convince as many as possible that all is well and getting better. They do so by cherry-picking data which serves their purposes. When necessary, they manipulate the economic data (see here for an evaluation of which data are trustworthy) to make it work in their favor. The attempt to con people into believing there is a recovery is both disgraceful and deceitful, but it does reveal the true government objectivet — survival no matter the cost to citizens.

Mr. Smith opines on the practice of what is taking place in an effort to fool people:

Our government is in effect a pathological liar–not just about wages, GDP and unemployment, but everything. Does any well-informed citizen believe anything the government claims is true, about Afghanistan, the budget, or future Federal liabilities?

Data is now massaged for political expediency, failure is spun into success, and consequences are shoved remorselessly onto the future generations. The entire policy of the Federal Reserve and the Federal government boils down to pushing propaganda in the hopes we’ll all swallow the con and believe that down is now up and our “leadership” is a swell bunch of guys and gals instead of sociopaths who will say anything to evade the consequences of their actions and policy choices.

Sadly, or perhaps happily, this government is near the end of its road. Past promises are increasingly viewed as promises that will be broken. New promises are seen by all but the most ignorant and desperate as false. The country’s debt has been downgraded. Future buyers will fall short of our debt needs. The government is in a debt death spiral from which there is no escape. Many citizens now recognize that government spending at these levels is unsustainable. Massive cuts will be necessary in order to save it.

The problems created by the political class are now too big to be solved by the political class. Citizens vote but it is unlikely that many will willingly vote for candidates who promise to reduce their benefits. No candidate that I know of has ever won running on such a platform. This time will be no different.

Special Election on The Way

Voters will elect and re-elect this November. Whichever candidates they elect does not matter. Markets will choose ending for our government and the economy. Markets are not swayed by propaganda. When they call their “special election” is unknowable, but surely it is getting close. When it comes, it will be a debacle unlike any seen in our lifetimes, perhaps in the history of the world. We have passed the point where who you elect matters any more.

The timing of the necessary correction to both our politics and our economy is out of our hands and the hands of those we elect. Markets will decide the time, place and outcome of the biggest “election” this country has ever seen.

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2 Comments

  1. This piece reminds me of the “city-states” of Central Europe during the High Middle Ages. These little islands of political and economic freedom were a counter to the rural autocracy of the Holy Roman Empire. Local kings would usually grant a charter to a city once it hit a level of economic prosperity. The reasons were simple: more economic activity equated to more taxes. These cities were allowed to elect thier own city councils, mint thier own coins, create thier own laws, and manage thier own affairs. Cities like Luebeck, Cologne, Bremen, and Hamburg were just a few of these “free cities”. The only requirement from the King was for the burgers behave themselves and of course pay taxes.

    When we speak of economic confidence we speak of some subjective emotion that is coupled with hard personal facts. One knows intuitively if things are going well. It isn’t just personal income, but the income of family members, neighbors, as well as future prospects for ones own children. These city states were tiny islands surrounded by a sea of poverty, wars, famine, pestilence, as well as the brooding avarice of Kings. Life was still brutally hard; many cities learnt early that one small bakery fire could engulf the entire city. Diseases were common, and life expectancy was still short by modern standards. But these little zones of freedom gave the city burgers the confidence needed to steadily improve thier lot in life. The amount of wealth they created was astonding. By the end of the High Middle Ages the most prosperous of these city states aligned themselves into an association known as the Hanseatic League. They were so successful at trading goods that for the first time, Europeans were able to enjoy a cross section of goods otherwise unavailable. The famous Bock Biers of Einbeck is a good example; Before the Thrist Years war, Eibeck (a small city of 20,000) boasted of 60 breweries -almost all of them were created to satisfy its export trade.Einbeck even exported its famed beer to the Holy Land during the Crusades.. In London, the Hanseatic League was allowed to set up shop duty-free. From Russia to Byzantium, goods from Central Europe were traded at a steadily increased pace. Unfortunately, it all came to an end during the Thirty Years War. Few people today realize how devastating the Thirty Years War was to Central Europe. Almost every major city was beseiged, looted, or burnt to the ground. The population of Central Germany was halved in a period of just 30 years.

    The human spirit, if given even a modicum of freedom can do wonders. The bad news is that modern Progressives have a knack for extinguishing the kind of “animal spirits” that can sustain a society. The UK, once a bastion of free trade and commerce, is now a shell of its former self. Time is running out.

  2. I think that confidence is a critical component of economic activity. When people are confident they buy, when they are not confident they hold or sell. However, what are people confident in? I would say their political leaders, the company they work for or their own business if there is a demand for their product. We see the political battle now being waged. Conservatives by definition are rational, observing and logical in their thought processes and understand what fools Obama and the democrats are. We understand that they are destroying the greatest economic engine that has ever run down the tracks. We know what the end result of their assault on industry and capital will be. We know this, the results are certain.

    Liberals on the other hand want only one thing and that is power. Their goal in this election season is to convince enough fools that Obama is a great guy, a scrapper, a fighter for the little guy against the evil exploitive capitalists who have kept the masses down. Obama and the democrat message is that they will get a piece of the pie to all citizens regardless of intelligence, education, work experience or work ethic. All are entitled to their fair share.

    The goal of the conservative must be to shatter the Obama myth of competency. The goal of the liberal must be to demonize the producers and destroy confidence is our capitalist way of life. A brief study of communism shows that masses turned to communism when they were afraid, when big government seemed the only solution to severe problems that they faced. Growing up in the sixties I never in my wildest imaginations ever would have thought that our nation could be taken in by the communist message, but here were are a half century later truly flirting with it. People are willing to trade their freedom for the perceived security that communism brings.

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